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HMRC internal manual

International Manual

Controlled Foreign Companies: The CFC Charge Gateway: Chapter 4 - Profits attributable to UK activities: Exclusions - Trading profits: Intellectual property (IP) condition


The intellectual property (IP) condition will not be met by CFCs whose profits are derived to any significant extent from IP transferred from related parties in the UK. Such transfers are often indicators of avoidance arrangements, and can involve IP profits being moved out of the UK into a CFC, whilst the activity that generates those profits remains, to a greater or lesser extent, in the UK.

Transfers are not defined by the legislation, but include direct and indirect transfer of IP from UK related parties, and IP otherwise derived from IP held by UK related parties. This approach is intended to pick up intra-group sales of IP, together with other contractual arrangements which enable IP profits to be retained by the CFC. So, for example, the simple intra-group transfer of IP from the UK parent to a CFC would qualify as a transfer of IP, but equally a licence or sub-licence of IP rights from the UK to a CFC would also constitute a transfer in this context.

This condition works by considering whether the CFC holds IP which has been transferred from UK related parties, and disregarding small or insignificant transfers. The condition is met unless IP has been transferred from UK related parties either during the accounting period or the preceding last six years ( the “relevant period”), and the transferred IP forms a significant part of the total IP of the CFC, or the profits of the CFC are significantly higher than they would have been absent that transfer.

The condition first identifies whether there have been any IP transfers from related persons within the relevant period and, if there have, whether the profits of the transferor(s) have been significantly reduced as a result of the transfers. If this is the case, and only parts of the exploited IP was transferred, a separate condition (called the “significance” condition) also has to be considered.

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The significance condition

The significance condition asks whether IP transferred from the UK (“the UK derived IP”) forms a significant part of the total IP held by the CFC (“the exploited IP” ) or whether, as a result of those transfers from the UK, the CFC’s profits are significantly higher than they would have been.

Intellectual Property is defined as

(a) any patent, trade mark, registered design, copyright or design right, or

(b) any licence or other right in relation to anything falling within paragraph (a) (see INTM248100 for the full definition).

The legislation does not define “significant” and the facts and circumstances of each case will have to be taken into account. However, as a rule of thumb, “significant” can be taken to mean 10% or more. So, in applying this condition, a significant part of the total exploited IP would be 10% or more of the total IP held by the CFC. Similarly, if holding the transferred IP increases the profits of the CFC by 10% or more, those profits can be said to be significantly higher than they would have been absent the transfer.